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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

|    |  |                                                                                                                                            
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2001

|      |  |                                                                                                                            
|----- |  | ---------------------------------------------------------------------------------------------------------------------------
|[   ] |  | TRANSITION REPORT PURSUANT OR TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the transition period  to

Commission File Number: 1-10916

INTERVISUAL BOOKS, INC.
(Exact name of registrant as specified in its charter)

|                                       |  |                    
|-------------------------------------- |  | -------------------
|California                             |  | 95-2929217         
|(State or other jurisdiction of        |  | (I.R.S. Employer   
|incorporation or organization)         |  | Identification No.)
|                                      
|2716 Ocean Park Boulevard, Suite 2020  |  |                    
|Santa Monica, California               |  | 90405              
|                                       |  |                    
|Address of principal executive offices |  | Zip Code           

Registrants telephone number, including area code: (310) 396-8708

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.        Yes [X] No [   ]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.        Yes [   ] No [   ]

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practical date. As of September 30, 2001, there were 6,031,490 shares of
common stock outstanding.





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|                            |                                                                                               |                                            |  |  |  |  |  | 
|--------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|                            |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                            |                                                                                               | STATEMENTS OF OPERATIONS                  
|                            |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                            |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                            | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                            | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II  OTHER INFORMATION
|                            | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                 



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INTERVISUAL BOOKS, INC.

TABLE OF CONTENTS

|                               |                                                                     |                                                                                    |    |      |   | 
|------------------------------ | ------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | -- | ---- | - | 
|                               |                                                                     |                                                                                    |    | Page
|                               |                                                                     |                                                                                    |    |     
|PART I  FINANCIAL INFORMATION |                                                                     |                                                                                    |    |     
|                              
|                               | Item 1. Consolidated Financial Statements                           |                                                                                    |    |      |  
|                              
|                               |                                                                     | Balance Sheets  September 30, 2001, and December 31, 2000                         |    |      | 1 | 
|                              
|                               |                                                                     | Statements of Operations  Three and nine months ended
September 30, 2001 and 2000 |    |      | 2 | 
|                              
|                               |                                                                     | Statements of Cash Flows Nine months ended
September 30, 2001 and 2000            |    |      | 3 | 
|                              
|                               |                                                                     | Notes to Financial Statements  September 30, 2001                                 |    |      | 4 | 
|                              
|                               | Item 2. Managements Discussion and Analysis of Financial Condition |                                                                                    |    | 8    |  
|                               |                                                                     | and Results of Operations                                                          |    |      |   | 
|                              
|                               | Item 3. Quantitative and Qualitative Disclosures about Market Risk  |                                                                                    |    | 12   |  
|                              
|PART II  OTHER INFORMATION    |                                                                     |                                                                                    |    |     
|                              
|                               | Item 6. Exhibits and Reports on Form 8-K                            |                                                                                    |    | 13   |  
|                              
|SIGNATURES                     |                                                                     |                                                                                    | 13 |     

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INTERVISUAL BOOKS, INC.




CONSOLIDATED BALANCE SHEETS


(In thousands)


|                                                                             |                                                                                                                                                            |                            |                      |        |             |       |          |        |        |       | 
|---------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------------------- | ------ | ----------- | ----- | -------- | ------ | ------ | ----- | 
|                                                                             |                                                                                                                                                            |                            |                      |        | (unaudited) |       |          |        |       
|                                                                             |                                                                                                                                                            |                            |                      |        | 9/30/01     |       | 12/31/00
|                                                                             |                                                                                                                                                            |                            |                      |        |             |       |         
|ASSETS                                                                       |                                                                                                                                                            |                            |                      |        |             |       |          |       
|Current Assets:                                                              |                                                                                                                                                            |                            |                      |        |             |       |          |       
|                                                                             | Cash and cash equivalents                                                                                                                                  |                            | $                    | 268    |             |       | $        | 396    |       
|                                                                             | Accounts receivable, less allowances
of $85 and $284                                                                                                       |                            |                      | 4,567  |             |       |          | 5,179  |       
|                                                                             | Inventories                                                                                                                                                |                            |                      | 2,277  |             |       |          | 1,883  |       
|                                                                             | Prepaid expenses                                                                                                                                           |                            |                      | 243    |             |       |          | 75     |       
|                                                                             | Commission & royalty advances                                                                                                                              |                            |                      | 277    |             |       |          | 289    |       
|                                                                             | Other current assets                                                                                                                                       |                            |                      | 65     |             |       |          | 239    |       
|                                                                             |                                                                                                                                                            |                            |                      |        |             |       |          |       
|                                                                             |                                                                                                                                                            |                            | Total current assets |        |             | 7,697 |          |        |        | 8,061 | 
|Production costs, net of accumulated
amortization of $19,692 and $18,588     |                                                                                                                                                            |                            | 3,428                |        |             |       | 3,675    |       
|Goodwill                                                                     |                                                                                                                                                            |                            | 1,402                |        |             |       | 1,462    |       
|Acquisition costs                                                            |                                                                                                                                                            |                            | 194                  |        |             |       | 284      |       
|Property and equipment, net of accumulated
depreciation of $1,863 and $1,799 |                                                                                                                                                            |                            | 174                  |        |             |       | 199      |       
|Deferred income taxes                                                        |                                                                                                                                                            |                            | 250                  |        |             |       | 250      |       
|                                                                             |                                                                                                                                                            |                            |                      |        |             |       |          |       
|                                                                             |                                                                                                                                                            | $                          | 13,145               |        |             | $     | 13,931   |       
|                                                                             |                                                                                                                                                            |                            |                      |        |             |       |          |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                         |                                                                                                                                                            |                            |                      |        |             |       |          |       
|Current Liabilities:                                                         |                                                                                                                                                            |                            |                      |        |             |       |          |       
|                                                                             | Accounts payable                                                                                                                                           |                            | $                    | 6,454  |             |       | $        | 6,076  |       
|                                                                             | Term loan with bank                                                                                                                                        |                            |                      | 2,175  |             |       |          | 345    |       
|                                                                             | Line of credit with private party                                                                                                                          |                            |                      | 2,050  |             |       |          | 250    |       
|                                                                             | Accrued royalties                                                                                                                                          |                            |                      | 357    |             |       |          | 325    |       
|                                                                             | Accrued expenses                                                                                                                                           |                            |                      | 333    |             |       |          | 430    |       
|                                                                             | Customer deposits                                                                                                                                          |                            |                      | 171    |             |       |          | 183    |       
|                                                                             |                                                                                                                                                            |                            |                      |        |             |       |          |       
|                                                                             |                                                                                                                                                            | Total current liabilities  |                      |        | 11,540      |       |          |        | 7,609  |      
|Term loan with bank, less current portion                                    |                                                                                                                                                            |                            |                     |        |             |       | 2,130    |       
|Line of credit with private party, less current portion                      |                                                                                                                                                            |                            |                     |        |             |       | 2,050    |       
|Other liabilities-long term                                                  |                                                                                                                                                            |                            | 44                   |        |             |       | 85       |       
|                                                                             |                                                                                                                                                            |                            |                      |        |             |       |          |       
|                                                                             |                                                                                                                                                            | TOTAL LIABILITIES          |                      |        | 11,584      |       |          |        | 11,874 |      
|                                                                             |                                                                                                                                                            |                            |                      |        |             |       |          |       
|Stockholders Equity:                                                        |                                                                                                                                                            |                            |                      |        |             |       |          |       
|                                                                             | Preferred stock, shares authorized
3,000,000, none issued                                                                                                  |                            |                      |       |             |       |          |       |       
|                                                                             | Common stock, no par value; shares
authorized 12,000,000, shares issued and
outstanding 6,031,490 at September 30,
2001 and 5,955,383 at December 31, 2000 |                            |                      | 5,471  |             |       |          | 5,391  |       
|                                                                             | Additional paid in capital                                                                                                                                 |                            |                      | 501    |             |       |          | 501    |       
|                                                                             | Accumulated deficit                                                                                                                                        |                            |                      | (4,411 | )           |       |          | (3,835 | )     
|                                                                             |                                                                                                                                                            |                            |                      |        |             |       |          |       
|                                                                             |                                                                                                                                                            | TOTAL STOCKHOLDERS EQUITY |                      |        | 1,561       |       |          |        | 2,057  |      
|                                                                             |                                                                                                                                                            |                            |                      |        |             |       |          |       
|                                                                             |                                                                                                                                                            | $                          | 13,145               |        |             | $     | 13,931   |       
|                                                                             |                                                                                                                                                            |                            |                      |        |             |       |          |       

See notes to consolidated financial statements.

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INTERVISUAL BOOKS, INC.




STATEMENTS OF OPERATIONS


(In thousands except per share data)
(Unaudited)


|                                                                      |                   |   |                             |       |                            |   |       |       |      |   |        |       |   |   |        |       |  
|--------------------------------------------------------------------- | ----------------- | - | --------------------------- | ----- | -------------------------- | - | ----- | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                      |                   |   | Three Months ended Sept 30, |       | Nine Months Ended Sept 30,
|                                                                      |                   |   |                             |       |                           
|                                                                      |                   |   | 2001                        |       | 2000                       |   | 2001  |       | 2000
|                                                                      |                   |   |                             |       |                            |   |       |       |     
|Net sales                                                             |                   | $ | 6,006                       |       |                            | $ | 6,194 |       |      | $ | 15,173 |       |   | $ | 14,447 |      
|Rights income                                                         |                   |   | 24                          |       |                            |   | 15    |       |      |   | 80     |       |   |   | 83     |      
|                                                                      |                   |   |                             |       |                            |   |       |       |      |   |        |       |   |   |        |      
|Total revenues                                                        |                   |   | 6,030                       |       |                            |   | 6,209 |       |      |   | 15,253 |       |   |   | 14,530 |      
|Cost of sales                                                         |                   |   | 4,799                       |       |                            |   | 4,888 |       |      |   | 11,813 |       |   |   | 11,427 |      
|                                                                      |                   |   |                             |       |                            |   |       |       |      |   |        |       |   |   |        |      
|Gross profit                                                          |                   |   | 1,231                       |       |                            |   | 1,321 |       |      |   | 3,440  |       |   |   | 3,103  |      
|Selling, general and
administrative expense                           |                   |   | 1,204                       |       |                            |   | 1,341 |       |      |   | 3,590  |       |   |   | 3,905  |      
|                                                                      |                   |   |                             |       |                            |   |       |       |      |   |        |       |   |   |        |      
|Income(loss) from operations                                          |                   |   | 27                          |       |                            |   | (20   | )     |      |   | (150   | )     |   |   | (802   | )    
|Interest expense                                                      |                   |   | (106                        | )     |                            |   | (175  | )     |      |   | (426   | )     |   |   | (413   | )    
|                                                                      |                   |   |                             |       |                            |   |       |       |      |   |        |       |   |   |        |      
|Net loss                                                              |                   | $ | (79                         | )     |                            | $ | (195  | )     |      | $ | (576   | )     |   | $ | (1,215 | )    
|                                                                      |                   |   |                             |       |                            |   |       |       |      |   |        |       |   |   |        |      
|Loss per common share:                                                |                   |   |                             |       |                            |   |       |       |      |   |        |       |   |   |        |      
|                                                                      | Basic and diluted |   | $                           | (0.01 | )                          |   | $     | (0.03 | )    |   | $      | (0.10 | ) |   | $      | (0.20 | )
|                                                                      |                   |   |                             |       |                            |   |       |       |      |   |        |       |   |   |        |      
|Weighted average number
of common shares and
equivalents outstanding: |                   |   |                             |       |                            |   |       |       |      |   |        |       |   |   |        |      
|                                                                      | Basic and diluted |   |                             | 6,031 |                            |   |       | 5,947 |      |   |        | 5,982 |   |   |        | 5,935 |  
|                                                                      |                   |   |                             |       |                            |   |       |       |      |   |        |       |   |   |        |      

See notes to consolidated financial statements.

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INTERVISUAL BOOKS, INC.




CONSOLIDATED STATEMENTS OF CASH FLOWS


Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
(Unaudited)


|                                                   |                                                                                           |                                                  |                                             |                                                     |     |                            |       |        |     |       |        |  
|-------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------- | --------------------------------------------------- | --- | -------------------------- | ----- | ------ | --- | ----- | ------ | -
|                                                   |                                                                                           |                                                  |                                             |                                                     |     | Nine Months Ended Sept 30,
|                                                   |                                                                                           |                                                  |                                             |                                                     |     |                           
|                                                   |                                                                                           |                                                  |                                             |                                                     |     | 2001                       |       | 2000  
|                                                   |                                                                                           |                                                  |                                             |                                                     |     |                            |       |       
|Cash flows from operating activities:              |                                                                                           |                                                  |                                             |                                                     |     |                            |       |       
|                                                   | Net loss                                                                                  |                                                  | $                                           | (576                                                | )   |                            | $     | (1,215 | )  
|                                                   | Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |                                                  |                                             |                                                     |     |                            |       |        |    
|                                                   |                                                                                           |                                                  | Depreciation and amortization               |                                                     |     | 1,267                      |       |        |     | 1,026 |       
|                                                   |                                                                                           |                                                  | Provision for losses on accounts receivable |                                                     |     | 16                         |       |        |     | (20   | )     
|                                                   |                                                                                           |                                                  | Provision for abandoned titles              |                                                     |     | 30                         |       |        |     | 21    |       
|                                                   |                                                                                           |                                                  | Stock-based compensation expense            |                                                     |     |                           |       |        |     | 18    |       
|                                                   |                                                                                           |                                                  | Increase (decrease) from changes in:        |                                                     |     |                            |       |        |     |       |       
|                                                   |                                                                                           |                                                  |                                             | Accounts receivable                                 |     |                            | 595   |        |     |       | (440   | )
|                                                   |                                                                                           |                                                  |                                             | Inventories                                         |     |                            | (394  | )      |     |       | (391   | )
|                                                   |                                                                                           |                                                  |                                             | Prepaid expenses                                    |     |                            | (167  | )      |     |       | (128   | )
|                                                   |                                                                                           |                                                  |                                             | Royalty advances                                    |     |                            | 12    |        |     |       | 66     |  
|                                                   |                                                                                           |                                                  |                                             | Other current assets                                |     |                            | 174   |        |     |       | (32    | )
|                                                   |                                                                                           |                                                  |                                             | Accounts payable                                    |     |                            | 378   |        |     |       | 960    |  
|                                                   |                                                                                           |                                                  |                                             | Accrued royalties                                   |     |                            | 32    |        |     |       | (342   | )
|                                                   |                                                                                           |                                                  |                                             | Accrued expenses                                    |     |                            | (17   | )      |     |       | 208    |  
|                                                   |                                                                                           |                                                  |                                             | Customer deposits                                   |     |                            | (12   | )      |     |       | (46    | )
|                                                   |                                                                                           |                                                  |                                             | Other liabilities                                   |     |                            | (41   | )      |     |       | (28    | )
|                                                   |                                                                                           |                                                  |                                             |                                                     |     |                            |       |       
|                                                   |                                                                                           |                                                  |                                             | Net cash provided by (used in) operating activities |     |                            | 1,297 |        |     |       | (343   | )
|                                                   |                                                                                           |                                                  |                                             |                                                     |     |                            |       |       
|Cash flows from investing activities:              |                                                                                           |                                                  |                                             |                                                     |     |                            |       |       
|                                                   | Additions to property and equipment                                                       |                                                  |                                             | (39                                                 | )   |                            |       | (62    | )  
|                                                   | Additions to production costs                                                             |                                                  |                                             | (836                                                | )   |                            |       | (1,077 | )  
|                                                   |                                                                                           |                                                  |                                             |                                                     |     |                            |       |       
|                                                   |                                                                                           |                                                  |                                             | Net cash used in investing activities               |     |                            | (875  | )      |     |       | (1,139 | )
|                                                   |                                                                                           |                                                  |                                             |                                                     |     |                            |       |       
|Cash flows from financing activities:              |                                                                                           |                                                  |                                             |                                                     |     |                            |       |       
|                                                   | Proceeds from exercise of options                                                         |                                                  |                                             |                                                    |     |                            |       | 52     |    
|                                                   | Proceeds from bank line of credit                                                         |                                                  |                                             |                                                     |     |                            |       | 1,000  |    
|                                                   | Repayment to bank line of credit                                                          |                                                  |                                             | (300                                                | )   |                            |       |       |    
|                                                   | Proceeds from subordinated line of credit                                                 |                                                  |                                             |                                                    |     |                            |       | 100    |    
|                                                   | Repayment to subordinated line of credit                                                  |                                                  |                                             | (250                                                | )   |                            |       |       |    
|                                                   |                                                                                           |                                                  |                                             |                                                     |     |                            |       |       
|                                                   |                                                                                           |                                                  |                                             | Net cash (used in) provided by financing activities |     |                            | (550  | )      |     |       | 1,152  |  
|                                                   |                                                                                           |                                                  |                                             |                                                     |     |                            |       |       
|Net decrease in cash and cash equivalents          |                                                                                           |                                                  | (128                                        | )                                                   |     |                            | (330  | )     
|Cash and cash equivalents, beginning of period     |                                                                                           |                                                  | 396                                         |                                                     |     |                            | 644   |       
|                                                   |                                                                                           |                                                  |                                             |                                                     |     |                            |       |       
|Cash and cash equivalents, end of period           |                                                                                           | $                                                | 268                                         |                                                     |     | $                          | 314   |       
|                                                   |                                                                                           |                                                  |                                             |                                                     |     |                            |       |       
|Supplemental disclosures of cash flow information: |                                                                                           |                                                  |                                             |                                                     |     |                            |       |       
|                                                   |                                                                                           | Cash paid during the period for interest expense |                                             | $                                                   | 392 |                            |       | $      | 243 |      

See notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2001
(unaudited)


Note 1  Statement of Information Furnished

In the opinion of management the accompanying unaudited financial statements
contain all adjustments (consisting only of normal and recurring accruals)
necessary to present fairly the financial position as of September 30, 2001,
and the results of operations and cash flows for the three and nine month
periods ended September 30, 2001 and 2000. These results have been determined
on the basis of generally accepted accounting principles and practices applied
consistently with those used in the preparation of the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2000. The results of
operations for the three and nine month periods ended September 30, 2001, are
not necessarily indicative of the results to be expected for any other period
or for the entire year.

Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying financial
statements should be read in conjunction with the Companys audited financial
statements and notes thereto included in the Companys Annual Report on Form
10-K for the year ended December 31, 2000.

Note 2  Liquidity

The Company has experienced operating losses and negative cash flows for the
year ended December 31, 2000 and the nine months ended September 30, 2001. The
Companys business tends to be seasonal, as is the publishing business as a
whole, with the major volume of sales typically occurring in the last six
months of the year. As a result, the Companys cash position is at its lowest
during the months of May through September. Furthermore, the Company can no
longer borrow under either its term loan or subordinated credit facility. In
response to the losses and negative cash flow throughout the quarter, the
Company has made progress payments to its printers, eliminated positions
through attrition, implemented further cost savings and reductions in overhead,
and offered prepayment discounts to key customers.

In addition, as of September 30, 2001 the Company
was not in compliance with the financial covenants contained in its
amortizing term loan. As of the date of this filing, the Company was
still in negotiations with the lender seeking either to amend the
financial covenants or a waiver from lender of the non-compliance.
Furthermore, a default under the term loan also constitutes a default
under the Companys subordinated credit facility with a private
party. If demand for payment is made, the Company would not currently be able
to make the required payment.

As previously disclosed, the Company has been actively attempting to secure
additional equity and/or debt financing to help it address its short- and
long-term liquidity needs. Recently, the Company entered into a non-binding
letter of intent with a potential investor concerning the possible issuance by
the Company of Series A convertible preferred stock and common stock purchase
warrants. The interests of the current Company shareholders will be
substantially diluted if the proposed financing is completed. In addition, the
Companys two largest shareholders are being asked to sign an agreement
whereby, among other things, they would agree to vote their shares so that the
investor would be able to elect a majority of the Companys directors. As part
of the transaction, a new chief executive officer selected by the investor
would be put into place. The proposed transaction is subject to conditions
and, at this time, the parties are in the process of negotiating definitive
documents and material terms, including pricing. There can be no assurance
that the definitive documents will be executed and that the proposed financing
will be completed. If the proposed financing is not completed on a timely
basis and the Company is not able to quickly obtain alternative financing, its
business and current operations will be materially adversely affected.

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Note 3  Loss Per Common Share

The Company computes loss per common share under SFAS No. 128, Earnings Per
Share, which requires presentation of basic and diluted earnings (loss) per
share. Basic earnings (loss) per common share is computed by dividing income
or loss available to common shareholders by the weighted average number of
common shares outstanding for the reporting period. Diluted earnings (loss)
per common share reflects the potential dilution that could occur if securities
or other contracts, such as stock options, to issue common stock were exercised
or converted into common stock. Common stock options for the three and nine
months ended September 30, 2001 and 2000 were not included in the computation
of diluted loss per common share because the effect would be antidilutive. For
the three and nine month periods ended September 30, 2001 there were options
and warrants to purchase 1,592,316 shares, which were not included in the
computation of diluted loss per common share because the effect would be
antidilutive.

Note 4  Term Loan With a Bank

As of September 30, 2001, the Company has an amortizing term loan with a bank.
Amounts outstanding under the facility bear interest at prime (6% as of
September 30, 2001) plus 4%, and are secured by the Companys assets. In April
2001, the Company signed an amendment to the line of credit agreement which
extended the maturity date to June 30, 2002, converted the line of credit to an
amortizing term loan, and increased the interest rate to 4% over the banks
prime rate. In addition, certain financial covenants were amended. As
amended, the Lender is no longer obligated to make future advances under the
line. Pursuant to the amended agreement, the Company was required to make a
principal payment of $225,000 on or before June 30, 2001. In addition, the
Company agreed to pay $15,000 per month commencing May 1, 2001, which amount is
to be applied to the outstanding principal. In further consideration for the
amendments, the Company paid to the bank a fee of $25,000. The Company has
made the required payments in accordance with the agreement. At September 30,
2001, the Company had an outstanding indebtedness of $2,175,000 under this
loan, which is classified as a current liability. As of
September 30, 2001, the Company was not in compliance with the
financial covenants contained in the amortizing term loan. As of the
date of this filing, the Company was still in negotiations with the
lender seeking either to amend the financial covenants or a waiver
from lender of the non-compliance. In addition, as of the date of
this filing the lender has not made a demand for payment under the
term loan. If the default is called and demand for payment made, the
Company would not currently be able to make the payment. A default
under the term loan also constitutes a default under the
Companys subordinated credit facility with a private party
discussed below.

Note 5  Credit Facility with a Private Party

As of September 30, 2001, the Company has a subordinated credit facility with a
private party. The credit facility is subordinated to the bank line of credit
discussed in Note 3. Amounts outstanding under this facility bear interest at
5% above LIBOR and are secured by the Companys assets. In April 2001, the
Company entered into Amendment Number 1 with the subordinated lender which
extended the maturity date of the credit facility to June 30, 2002. As
amended, the Lender is no longer obligated to make future advances under the
line. Pursuant to the amended agreement, the Company paid the subordinated
lender $250,000 in April of 2001 and agreed to pay an additional $250,000 on or
before March 15, 2002, which amounts are to be applied to the outstanding
principal. In addition, the Company paid to the lender a fee of $10,000 in
April 2001. At September 30, 2001, the Company had outstanding indebtedness of
$2,050,000 under this facility, which is classified as a current liability.

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Note 6  Accounts Receivable and Payable

Fast Forward has an agreement with its customers and suppliers that allows for
returns of merchandise. Accordingly, a reserve for accounts receivable and
payable has been provided. The reserve accounts require the use of significant
estimates. Fast Forward believes the techniques and assumptions used in
establishing the reserve accounts are appropriate. At September 30, 2001, Fast
Forward recorded a reserve for returns against accounts receivable of $66,000
and a reserve for returns against accounts payable for $56,000.

Note 7  Segment Information

The Companys operations are classified into two principal reportable industry
segments: (a) video distribution sales which involves the sales and marketing
to video retailers, including childrens educational stores, gift shops, museum
stores and educational distributors and (b) sales from the production of pop-up
and dimensional novelty books for domestic and international distribution. The
difference between segment assets and consolidated assets at September 30, 2001
and 2000 is due to the corporate asset of goodwill not directly attributable to
the operating segments.

|                                      |  |       |           |      |  |          |            |   |  |  |            |  
|------------------------------------- |  | ----- | --------- | ---- |  | -------- | ---------- | - |  |  | ---------- | -
|Three Months Ended September 30, 2001 |  | Video |           | Book |  | Combined
|                                      |  |       |           |      |  |         
|Net sales to unaffiliated customers   |  |       | 1,053,824 |      |  |          | 4,951,709  |   |  |  | 6,005,533  |  
|Income (loss) from operations         |  |       | (273,096  | )    |  |          | 300,176    |   |  |  | 27,080     |  
|Identifiable assets                   |  |       | 3,229,715 |      |  |          | 8,512,836  |   |  |  | 11,742,551 |  
|                                     
|                                     
|Three Months Ended September 30, 2000 |  | Video |           | Book |  | Combined
|                                      |  |       |           |      |  |         
|Net sales to unaffiliated customers   |  |       | 2,554,720 |      |  |          | 3,639,145  |   |  |  | 6,193,865  |  
|Income (loss) from operations         |  |       | 220,345   |      |  |          | (239,975   | ) |  |  | (19,630    | )
|Identifiable assets                   |  |       | 5,071,238 |      |  |          | 9,707,081  |   |  |  | 14,778,319 |  
|                                     
|                                     
|Nine Months Ended September 30, 2001  |  | Video |           | Book |  | Combined
|                                      |  |       |           |      |  |         
|Net sales to unaffiliated customers   |  |       | 3,913,742 |      |  |          | 11,258,885 |   |  |  | 15,172,627 |  
|Income (loss) from operations         |  |       | (534,776  | )    |  |          | 384,575    |   |  |  | (150,201   | )
|Identifiable assets                   |  |       | 3,229,715 |      |  |          | 8,512,836  |   |  |  | 11,742,551 |  
|                                     
|                                     
|Nine Months Ended September 30, 2000  |  | Video |           | Book |  | Combined
|                                      |  |       |           |      |  |         
|Net sales to unaffiliated customers   |  |       | 7,098,591 |      |  |          | 7,347,980  |   |  |  | 14,446,571 |  
|Income (loss) from operations         |  |       | 382,774   |      |  |          | (1,184,917 | ) |  |  | (802,143   | )
|Identifiable assets                   |  |       | 5,071,238 |      |  |          | 9,707,081  |   |  |  | 14,778,319 |  

Note 8 Contingencies

In the ordinary course of business, the Company is
subject to various legal proceedings and claims. In the opinion of
management, the amount of ultimate liability with respect to these
proceedings will not materially affect the financial position,
results of operations, or cash flows of the Company.

Note 9 New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method
of accounting for business combinations initiated after June 30, 2001. SFAS
141 also requires that the Company recognize acquired intangible assets apart
from goodwill if the acquired intangible assets meet certain criteria. SFAS
141 applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon

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adoption of SFAS 142, that the Company reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS 141.

SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An
intangible asset with an indefinite useful life should be tested for impairment
in accordance with the guidance in SFAS 142. SFAS 142 is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those
assets were initially recognized. SFAS 142 requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption.
The Company is also required to reassess the useful lives of other intangible
assets within the first interim quarter after adoption of SFAS 142.

The Companys previous business combinations were accounted for using the
purchase method. As of September 30, 2001, the net carrying amount of goodwill
is approximately $1,402,000. Amortization expense during the nine month period
ended September 30, 2001 was approximately $60,000. Currently, the Company is
assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142
will impact its financial position and results of operations.

SFAS 143, Accounting for Asset Retirement Obligations, was issued in June 2001
and is effective for fiscal years beginning after June 15, 2002. SFAS 143
requires that any legal obligation related to the retirement of long-lived
assets be quantified and recorded as a liability with the associated asset
retirement cost capitalized on the balance sheet in the period it is incurred
when a reasonable estimate of the fair value of the liability can be
made. SFAS 143 will be adopted on its effective date, and adoption is
not expected to result in any material effects on the Corporations financial
statements.

SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was
issued in August 2001 and is effective for fiscal years beginning after
December 15, 2001. SFAS 144 provides a single, comprehensive accounting model
for impairment and disposal of long-lived assets and discontinued
operations. The company is currently assessing the impact of SFAS 144
but has not yet determined that effect on its financial position and
results of operation.

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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations

GENERAL

Intervisual Books, Inc. (the Company) creates and produces interactive and
three-dimensional books designed for children and adults. These products
include picture books, playsets, board books and gift books. The Companys
books incorporate dimensional and moveable features which require hand-assembly
in the manufacturing process. Some titles require the incorporation of such
materials as plush, plastic novelty elements and electronic audio chips into
the finished books.

The majority of the Companys concepts and ideas for projects are generated
internally by the in house creative and editorial departments. Additional ideas
and concepts are conceived by the illustrators and designers with whom the
Company has been associated for many years. After the Company conceives an idea
and makes a dummy book, key US and foreign publishers are consulted to
determine if they are interested in publishing and marketing the book. If an
agreement is reached, the Company and the publisher sign a co-publishing
contract which stipulates that the publisher will purchase the title with
exclusive rights to sell books in the English language to the book trade for
generally a two to four year period.

The market for packaged books has gone through recent changes which has made it
more difficult for the Company to generate co-editions. In the past five years,
there has been a consolidation trend in the US publishing industry that has
reduced the number of the Companys customers. Many of the surviving childrens
imprints are still consolidating, which is continuing to have a negative impact
on the size and frequency of their orders. The need to offset this decline is
the main reason behind the Companys decision to self-publish certain of its
titles. The Companys self-publishing program is in its fourth year and the
results continue to improve. The warehousing and order fulfillment for the
publishing business is being handled by an independent company located in
University Park, Illinois.

The Company does not engage in any of its own printing, binding, hand assembly,
or manufacturing. These services are contracted for with independent printers
in Colombia, Singapore, Hong Kong and Thailand. The Company supplies its
printers with artwork, color-separated materials and complete sample materials
to serve as guides for hand-assembly.

As a result of the Fast Forward Marketing acquisition in 1999, the Company also
distributes video and audio products, as well as DVDs for major motion picture
studios and independent producers. FFM has access to titles on subjects
ranging from blockbuster studio releases to exercise and childrens products.
FFM also sells and services the direct mail catalog industry.

The Company has experienced operating losses and negative cash flows for the
year ended December 31, 2000 and the nine months ended
September 30, 2001. The Companys business tends to be
seasonal, as is the publishing business as a whole, with the major
volume of sales typically occurring in the last six months of the
year. As a result, the Companys cash position is at its lowest
during the months of May through September. Furthermore, the Company
can no longer borrow under either its term loan or subordinated
credit facility. In response to the losses and negative cash flow
throughout the quarter, the Company has made progress payments to its
printers, eliminated positions through attrition, implemented further
cost savings and reductions in overhead, and offered prepayment
discounts to key customers.

In addition, as of September 30, 2001 the Company
was not in compliance with the financial covenants contained in its
amortizing term loan. As of the date of this filing, the Company was
still in negotiations with the lender seeking either to amend the
financial covenants or a waiver from lender of the non-compliance.
Furthermore, a default under the term loan also constitutes a default
under the Companys subordinated credit facility with a private
party. If demand for payment is made, the Company would not currently be able
to make the required payment.

As previously
disclosed, the Company has been actively attempting to secure additional equity
and/or debt financing to help it address its short- and long-term liquidity
needs. If the Company is not able to obtain additional financing, its business
and operations will be materially adversely affected.

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RESULTS OF OPERATIONS

Net sales for the three and nine month periods ended September 30, 2001 were
$6,006,000 and $15,173,000 as compared to $6,194,000 and $14,447,000 for the
prior year. This decrease of $188,000 for the third quarter of 2001 resulted
from increases of $1,244,000 in packaging sales and $69,000 in publishing sales
offset by a decrease of $1,501,000 in video sales. The sales increase of
$726,000 for the nine month period resulted from increases of $2,102,000 in
packaging sales and $1,809,000 in publishing sales offset by a decrease of
$3,185,000 in video sales. The increase in packaging sales can be attributed
primarily to sales of two Harry Potter titles shipped in the second and third
quarters of 2001 and a large sale of Grinch DVD playsets in the third quarter
of this year. Increases in publishing sales are a result of several key titles
being included in the store planograms of major retailers. A major factor in
the decline of video sales was the loss of two major customers, Store of
Knowledge and Natural Wonders. The Company anticipates further declines in
video sales for the balance of the year.

Gross profit margin for the three and nine month periods ended September 30,
2001 was 20.4% and 22.6% as compared to 21.3% and 21.4% for the same periods of
the prior year. This overall increase in gross profit margin for the nine
month period resulted primarily from an increase in gross profit margin from
publishing sales offset by a decrease in profit margin from video sales. The
Company is a distributor of video products that for the most part are the
properties of its suppliers. As a distributor, the Companys risk for unsold
inventory is limited and sales are made at lower margins than on its book
products. Cost of sales relating to the book sales consists primarily of
manufacturing, book development amortization and royalties.

Selling, general and administrative expenses for the three and nine month
periods ended September 30, 2001 were $1,204,000 and $3,590,000 as compared to
$1,341,000 and $3,905,000 for the comparable periods of the prior year. This
represented decreases of $137,000 for the quarter and $315,000 for the nine
month period. Personnel expenses were $499,000 and $1,622,000 for the three
and nine months ended September 30, 2001 as compared to $588,000 and $1,910,000
for the comparable periods of 2000. These decreases of $89,000 and $288,000
can be attributed primarily to officer salary reductions and a reduction in the
expense relating to a consulting agreement. Selling expenses were $290,000 and
$903,000 for the three and nine month periods ended September 30, 2001 compared
to $361,000 and $981,000 in 2000 resulting in decreases of approximately
$70,000 for both periods. These decreases were primarily a result of
decreases
in sample, show and field representative expenses offset by increases in
warehouse, marketing and catalog expenses. Administrative expenses were
$415,000 and $1,065,000 for the three and nine month periods ended September
30, 2001 as compared to $392,000 and $1,014,000 for the same periods of 2000.
This resulted in increases of $23,000 and $51,000 for the quarter and nine
months of 2001. The increases for the quarter and nine months were primarily a
result of increases in rent, legal, and bad debt expenses partially offset by decreases in insurance and depreciation.

Interest expense for the three and nine month periods ended September 30, 2001
was $106,000 and $426,000 as compared to $175,000 and $413,000 for the
comparable periods of 2000. The decrease of $69,000 for the quarter was
primarily attributable to lower principal balances resulting from lump sum
payments made to both lenders during the second quarter of 2001 offset by
higher interest rates. The increase of $13,000 for the nine months is
primarily a result of higher interest rates following the extension of its bank
loan in April 2001.

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The Company is currently in a loss carry-forward position; therefore, the
Company has not recorded an income tax provision for the three and nine months
ended September 30, 2001. The net operating loss carry-forward balance as of
September 30, 2001 was approximately $4,976,000 compared to $4,400,000 as of
December 31, 2000. The net operating loss carry-forward is available to offset
future taxable income through 2021. The Companys net operating loss
carry-forwards may be limited due to ownership changes as defined under Section
382 of the Internal Revenue Code of 1986.

Net losses for the three and nine month periods ended September 30, 2001 were
$79,000 and $576,000 as compared to $195,000 and $1,215,000 for the same
periods of the previous year. The reduction in net losses for the three and
nine months of 2001 resulted primarily from increased sales and lower overhead
costs.

LIQUIDITY AND CAPITAL RESOURCES

The Companys cash and cash equivalents decreased by $128,000 to $268,000 at
September 30, 2001 from $396,000 at December 31, 2000. At September 30, 2001,
working capital, including bank debt and senior debt, was $(3,843,000) compared
to $452,000 at December 31, 2000. If the Companys bank and subordinated debt,
both of which mature June 30, 2002 and have been reclassified as current
liabilities, are excluded from the calculation, then working capital would have
been $382,000. The decrease in cash was primarily from investing and financing
activities offset by cash provided by operating activities.

Net cash provided by operations was $1,297,000 for the nine months ended
September 30, 2001 as compared to $343,000 used in operations for the
corresponding period of the previous year. The $1,640,000 change in cash from
operations compared to the corresponding period was primarily attributable to a
decrease in net operating loss, a decrease in accounts receivable and an
increase in accounts payable offset by increases in inventories and prepaid
expenses. Net cash used in investing activities amounted to $875,000 as
compared to $1,139,000 during the same period in 2000. This decrease in cash
used is primarily from a decrease in production costs for the nine months of
2001 versus the same period of 2000. Net cash used in financing activities was
$550,000 in 2001 as compared to $1,152,000 provided by financing activities for
the same period in 2000. This change in cash resulted from the Companys
partial repayment of its bank and subordinated lines of credit in 2001 versus
$1,100,000 in borrowings on its credit facilities for the nine months of 2000.

As of September 30, 2001, the Company has an amortizing term loan with a bank.
Amounts outstanding under the facility bear interest at prime (6% as of
September 30, 2001) plus 4%, and are secured by the Companys assets. In April
2001, the Company signed an amendment to the line of credit agreement which
extended the maturity date to June 30, 2002, converted the line of credit to an
amortizing term loan, and increased the interest rate to 4% over the banks
prime rate. In addition, certain financial covenants were amended. As
amended, the Lender is no longer obligated to make future advances under the
line. Pursuant to the amended agreement, the Company was required to make a
principal payment of $225,000 on or before June 30, 2001. In addition, the
Company agreed to pay $15,000 per month commencing May 1, 2001, which amount is
to be applied to the outstanding principal. In further consideration for the
amendments, the Company paid to the bank a fee of $25,000. The Company has
made the required payments in accordance with the agreement. At September 30,
2001, the Company had an outstanding indebtedness of $2,175,000 under this
loan, which is classified as a current liability. As of
September 30, 2001, the Company was not in compliance with the
financial covenants contained in the amortizing term loan. As of the
date of this filing, the Company was still in negotiations with the
lender seeking either to amend the financial covenants or a waiver
from lender of the non-compliance. In addition, as of the date of
this filing the lender has not made a demand for payment under the
term loan. If the default is called and demand for payment made, the
Company would not currently be able to make the payment. A default
under the term loan also constitutes a default under the
Companys
subordinated credit facility with a private party discussed below.

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As of September 30, 2001, the Company has a subordinated credit facility with a
private party. The credit facility is subordinated to the bank line of credit
discussed in Note 3. Amounts outstanding under this facility bear interest at
5% above LIBOR and are secured by the Companys assets. In April 2001, the
Company entered into Amendment Number 1 with the subordinated lender which
extended the maturity date of the credit facility to June 30, 2002. As
amended, the Lender is no longer obligated to make future advances under the
line. Pursuant to the amended agreement, the Company paid the subordinated
lender $250,000 in April of 2001 and agreed to pay an additional $250,000 on or
before March 15, 2002, which amounts are to be applied to the outstanding
principal. In addition, the Company paid to the lender a fee of $10,000 in
April 2001. At September 30, 2001, the Company had outstanding indebtedness of
$2,050,000 under this facility, which is classified as a current liability.

The Company has experienced operating losses and negative cash flows for the
year ended December 31, 2000 and the nine months ended September 30, 2001. The
Companys business tends to be seasonal, as is the publishing business as a
whole, with the major volume of sales typically occurring in the last six
months of the year. As a result, the Companys cash position is at its lowest
during the months of May through September. Furthermore, the Company can no
longer borrow under either its term loan or subordinated credit facility. In
response to the losses and negative cash flow throughout the quarter, the
Company has made progress payments to its printers, eliminated positions
through attrition, implemented further cost savings and reductions in overhead,
and offered prepayment discounts to key customers.

As previously disclosed, the Company has been actively attempting to secure
additional equity and/or debt financing to help it address its short- and
long-term liquidity needs. Recently, the Company entered into a non-binding
letter of intent with a potential investor concerning the possible issuance by
the Company of Series A convertible preferred stock and common stock purchase
warrants. The interests of the current Company shareholders will be
substantially diluted if the proposed financing is completed. In addition, the
Companys two largest shareholders are being asked to sign an agreement
whereby, among other things, they would agree to vote their shares so that the
investor would be able to elect a majority of the Companys directors. As part
of the transaction, a new chief executive officer selected by the investor
would be put into place. The proposed transaction is subject to conditions
and, at this time, the parties are in the process of negotiating definitive
documents and material terms, including pricing. There can be no assurance
that the definitive documents will be executed and that the proposed financing
will be completed. If the proposed financing is not completed on a timely
basis and the Company is not able to quickly obtain alternative financing, its
business and current operations will be materially adversely affected.

As of November 1, 2001, the Company did not have commitments for any material
capital expenditures for 2001 or beyond.

We may face interruption of production and services due to increased security
measures in response to terrorism. Our business depends on the free flow of
products and services through the channels of commerce. Recently, in response
to terrorists activities and threats aimed at the United States,
transportation, mail, financial and other services have been slowed or stopped
altogether. Further delays or stoppages in transportation, mail, financial or
other services could have a material adverse effect on

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our business, results of operations and financial condition. Furthermore, we
may experience an increase in operating costs, such as costs for
transportation, insurance and security as a result of the activities and
potential activities. We may also experience delays in receiving payments from
payers that have been affected by the terrorist activities and potential
activities. The US economy in general is being adversely affected by the
terrorist activities and potential activities and any economic downturn could
adversely impact our results of operations, impair our ability to raise capital
or otherwise adversely affect our ability to grow our business.

This Report on Form 10-Q contains forward-looking statements and includes
assumptions concerning the Companys operations, future results and prospects.
These forward-looking statements are based on current expectations and are
subject to a number of risks, uncertainties and other factors. In connection
with the Private Securities Litigation Reform Act of 1995, the Company provides
the following cautionary statements identifying important factors which, among
other things, could cause the actual results and events to differ materially
from those set forth in or implied by the forward-looking statements and
related assumptions contained in this Section and in this entire Report. Such
factors include, but are not limited to: product demand and market acceptance
risks; the effect of economic conditions; the impact of competitive products
and pricing; changes in foreign exchange rates; product development and
commercialization difficulties; capacity and supply constraints or
difficulties; the Companys ability to obtain additional financing; the
Companys working capital difficulties; the Companys ability to modify,
restructure or replace its debt facilities when they come due; general business
and economic conditions; and changes in government laws and regulations,
including taxes.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

All sales by the Company are denominated in US dollars and, accordingly, the
Company does not enter into hedging transactions with regard to any foreign
currencies. Currency fluctuations can, however, increase the price of the
Companys products to its foreign customers which can adversely impact the
level of the Companys export sales from time to time. The majority of the
Companys cash equivalents are bank accounts and money markets, and all of the
Companys debt is variable rate. Therefore, the Company does not believe it
has significant market risk exposure with regard to its financial instruments.

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PART II  OTHER INFORMATION




Item 6. Exhibits and Reports on Form 8-K

|    |                                                 | 
|--- | ----------------------------------------------- | 
|(a) | Exhibits required by Item 601 of Regulation S-K
|    | None                                            | 
|   
|(b) | Reports on Form 8-K                            
|    | None                                           




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

| |  |                         |  |                                                               
| |  | ----------------------- |  | --------------------------------------------------------------
| |  | INTERVISUAL BOOKS, INC.
|
| |  | BY:                     |  | /s/ Nathan N. Sheinman                                        
| |  |                         |  |                                                               
| |  |                         |  | Nathan N. Sheinman, President
Chief Operating Officer         
|
| |  | BY:                     |  | /s/ Dan P. Reavis                                             
| |  |                         |  |                                                               
| |  |                         |  | Dan P. Reavis
Executive Vice President
Chief Financial Officer

Date: November 19, 2001

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